Tuesday, December 1, 2015

Macquarie Says 2016 Year To Hope For Return OF Capital Rather Than Return ON Capital

From ValueWalk, Nov. 25:

“2016 is shaping up as potentially a significant watershed year,” Asian equities research from Macquarie predicted. Watershed is a word that can either have positive or negative connotations, and in this framing Macquarie uses it to point out concerns with Fed policy and its impact on the world reserve currency of choice, the U.S. dollar. At the end of the day investors should consider return of their money rather than return on their money.

“Misaligned monetary policies” are cause for concern regarding potential for “sudden and significant shifts in currency, bond and commodity markets,” according to Macquarie Research. The risk is that the U.S. dollar trend higher moves very far, very fast in 2016.

“The key signal to watch would be a surge in US Dollar, potentially forcing China to embark on a much more aggressive Rmb devaluation,” Asian head of research Matt Nacard and his team deduced. Such a move “would significantly aggravate global disinflation,” which the research says is a strong base case.

Macquarie: Money supply is issue, Fed must reverse course to see global inflation

At issue is the supply of money. With the U.S. Fed tightening and sucking up dollar liquidity. This thought takes Macquarie down a rabbit hole of a probability path:

The bears would point to declining velocity of money across almost every developed and emerging market jurisdiction (with the only exception being low income economies), implying that incremental liquidity very quickly evaporates; and the bears would also highlight declining supply of US$ liquidity, as neither US velocity of money is improving nor the Fed seem to be prepared to undertake QE4. This in turn is already causing global aggregate demand, liquidity and trade to contract. It creates an environment where the US$ could easily surge, aggravating global deflationary pressures and kick-starting an accelerating currency devaluation competition.

The end analysis has a degree of supply and demand factored into the formula. As U.S. dollar supply shrinks, increasing demand, the resulting price expression could be persistent dollar momentum brought on by a spark of initial currency market volatility....MORE